AM: $#!+ or get off the pot

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:47 EST

AM Update

The market is flirting with 1473 and AAPL bounced back from yesterday’s dip under $500.  So far it is shaping up to be a good day.

MARKET BEHAVIOR

Stocks opened lower, rose to 1473, and are pulling back slightly in the early afternoon.  The pattern of weak opens continues, as does hitting our head on 1473.  Is the market resting before making an aggressive assault on 1473 by the end of the day?  Bulls are hoping so, but stalling for fourth day at 1473 is becoming a concern.

MARKET SENTIMENT

Buying dries up at 1473 and the sideways trade continues.  A longer consolidation often means a stronger move when it does happen.  This is because a particular resistance level becomes followed by more and more traders with each passing day.  1473 is quickly becoming a key buy signal for both momentum traders and a stop-loss for shorts.  That concentration of trades around one level sets the stage for an explosive move when we finally penetrate that level.  AAPL’s trade yesterday was a perfect example of this phenomena as the stock broke under $500.

The longer we hold these levels, the more confident both sides become.  Bears are emboldened by the inability to break 1473, while bulls see each failed selloff as a victory.  There is a good mix of bears and bulls in the market, so we don’t have a strong asymmetrical trade to take advantage of.  Under balanced conditions, the side that usually wins is the one that goes with the trend.  The trend is higher and that could ultimately break tie in this stalemate.

But the more balanced sentiment in the market limits the upside potential of a continuation.  Bears and pessimists fuel rallies, and without an overabundance, the rally can’t drive too far.  An upside breakout will draw in many of the sideline watchers and chases out the last shorts, but after that buying exhausts itself, we could fall under a vacuum of new demand.

TRADING OPPORTUNITIES

Expected Outcome:
For those that are long, stay long and wait for the expected breakout.  This is a bad place to be short right now and wait for further signs of weakness before getting in front of this market.  Trading against the trend is a really hard way to make money and I don’t recommend it.

Alternate Outcome:
Failing to break 1474 today would be a red flag and if we can’t grab that level by Thursday, we need to reevaluate our position.  For the longer-term trader this is trivial because it doesn’t matter if you zig and then zag, or zag and then zig.  But for those of us swing-trading these minor moves it makes a world of difference.  If we get turned back from 1473 again, watch for a dip back into the trading range and possibly a test of 1450.

AAPL daily at 1:57 EST

INDIVIDUAL STOCKS

AAPL bounced back and recovered $500.  This doesn’t mean the coast is clear, but it is extremely encouraging to see the selling exhaust itself and reverse.  Anyone who follows this blog knows there was not a lot of supply under $500 and selling would stall once the stop-loss selling ran its course and that is exactly what has happened.

AAPL is buyable here, just like it was buyable three-days ago.  This is a longer-term trade and anyone in this name needs to expect some near-term volatility.  If you find yourself with such a large position that you can’t sleep at night after days like yesterday, then you need to lighten up.

It will be interesting to see if AAPL retests $485 or if this was the last major shakeout before earnings.  The one thing that makes me cautions is so many people viewed this dip as a buying opportunity and that makes the contrarian in me nervous.  But if these new buyers are willing to hold the stock through some volatility, that keeps supply out of the market and we should rally.  Sometimes the contrarian trade is going with the market and this might be one of those times.

Stay safe

PM: A tale of two cities

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Stocks closed positive and the recent support is indicative of a continuation.  AAPL sent waves through the market as it broke $500, but is it setting up a double-bottom?

MARKET BEHAVIOR

The market closed above 1470 for the fourth consecutive day and it was the third time early selling failed to gain traction and bounced back in the afternoon.  The market is one point from setting a new 52-week high, but it continues struggling with 1474.  Volume was below average, but higher than Monday.

Bears cannot recruit new sellers to join them in bringing down the market, but at the same time bulls cannot break through the 52-week high either.  No doubt we will see a resolution to this stalemate in the next couple days.

MARKET SENTIMENT

I see a fundamental difference between bears inability to recruit sellers versus bulls struggling to entice buyers.  It is always easier to get people to sell, especially when headlines are negative and everyone is yelling overbought.  So why are bears having such a hard time shaking anyone loose?   Most likely it is because holders don’t want to sell and are comfortable holding through some near-term weakness.  These longer-viewed investors are keeping supply off the market and preventing any selloff from building momentum.

On the other side, bulls are dealing with reluctant buyers.  There are plenty of people standing around watching, but they hang back, unsure of these new levels.  But unlike bears who have failed to trigger follow-on selling after multiple market dips, bulls have not tried to get their bandwagon rolling yet.  Things could get exciting if the market finally breaks 1475 as shorts are squeezed and momentum buyers jump onboard.  But bulls must make their move before gravity takes over and the market drifts back to the lower end of the trading range.

TRADING OPPORTUNITIES

Expected Outcome:
Holders continued holding in the face of early weakness.  Their resolve to see this thing through keeps supply out of the market and this confidence supports an upside resolution to this consolidation.  How big that move will be is anyone’s guess.  A huge surge higher might not be sustainable, but a more modest one could let this market continue higher for a bit longer.

Alternate Outcome:
Bulls only have so long to make their move before they lose their credibility and the market will at least retest support at 1450.  When all else is equal, gravity takes over and prices slip because there are many reasons people sell, but only one reason to buy.

AAPL daily at end of day

INDIVIDUAL STOCKS

This is a tale of two cities.  While the broad market is holding up nicely, AAPL had a major violation of support.  With so many stop-losses concentrated under $500, it was too rich of a target for the market to pass up.  But now the technical driven selling came and went, the question is where do we go from  here.

In the comments of last night’s post I wrote about the psychology of a double bottom and what makes it work.  I’ll copy an excerpt here for those that missed it.

“We are seeing the psychology that makes double-bottoms such a common reversal pattern. The first rebound sucks in the eager buy-the-dip crowd, but because nothing in the market is easy, they get humiliated by the next pullback. A key part of the double bottom is the second bottom undercuts the first because this flushes out the last of the hopeful holders and sets the stage for a rebound.”

“There are no guarantees in the market, we are simply playing a game of probabilities. AAPL’s recent strength brought in bottom-pickers and they are running for cover these last two days. The rest of the ownership is value buyers who bought the stock in the face of recent declines and are willing to sit through some weakness. We could easily see further weakness, but there is a limited number of bottom-pickers remaining in the stock and once they are gone, supply will dry up and the stock will bounce.”

But while I don’t see a reason to bail on AAPL after today’s selling, this is a good time to talk about risk management.  First and foremost, if you are uncomfortable and uncertain, sell and reevaluate.  It is always easier to think clearly when you are outside the market looking in.  And you can always buy back in once you formulate a new plan of attack.

Another useful strategy is to limit your risk in any one trade to 3%.  Don’t mistake this with a 3% position or a 3% stop-loss.  That 3% limit is the amount of your account value you can lose on each trade.   If you have a $100k account, that means you can risk $3k on a single trade no matter how much you have invested.  If you have $50k in AAPL then you can take a 6% loss, but if you only have $10k invested in AAPL, then you can sit through a 30% pullback.

The reason for the 3% loss limit is it lets you live to fight another day.  With this you have to be wrong more than 20 times in a row before your account value will be cut in half.  Between the 3% rule and your calculated stop-loss target, you can figure out how large of a position you can take.  The tighter the stop-loss, the larger position you can take.

Stay safe

AM: Market bounces back, AAPL sellsoff

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:75 EST

AM Update

The market bounced back from early weakness for the third day in a row, showing bears are struggling to recruit new pessimists needed to drive the market lower.  AAPL is downgraded and dips under the overly-followed $500 level and triggers a wave of autopilot stop-loss selling.  But chances are this is a short-lived event.

MARKET BEHAVIOR

Stocks opened weak, but are recovering in mid-morning trade.  We dropped to 1463 before bouncing back.    While the day is still negative, it is encouraging to see the market find a floor and the early weakness didn’t trigger a larger wave of selling.  This was the third day in a row bears tried to break the market but were rebuffed just hours later.  Bull markets often see early weakness followed by late strength, and that is exactly what we have here.

MARKET SENTIMENT

It could be assumed early weakness is driven by active traders trying to get a head start on the expected pullback.  But this smaller group doesn’t have sustaining power and their selling pressure quickly fizzles after they fail to induce other holders to join the selling.

This pattern is encouraging because it shows the larger group of holders willing to hold through some weakness.  This makes sense because all the negative headlines are already out there and anyone afraid of this market is not holding stocks.  This means those that are holding here are doing it in spite of the pessimism and recycling the same old headlines won’t spook them out of their position.  If most holders are taking a longer-term view of the market, that will send stocks higher because their confidence and conviction keeps supply out of the market during any weakness.

TRADING OPPORTUNITIES

Expected Outcome:
Three failed selloffs suggests the next move is higher.  With all the shorts that jumped in the market over the last few days, there is a good amount of fuel for a short-squeeze when we break through 1472.  The question then becomes how to trade the short-squeeze.  Do we hold for further gains, or lock in those profits before demand dries up?  Good question and I really don’t have an answer.  It is never wrong to lock in profits after a nice run, but it is also a shame to jump off a larger run prematurely.  All we can do is evaluate the situation as it develops and make our decision when we get to that juncture.

Alternate Outcome:
There are a lot of new buyers that jumped in after the market passed 1450 who would be in the red if we fall under this key technical level.  Expect a dip under this widely followed level to trigger a wave of selling that could push the market down to the 50dma.

AAPL daily at 1:00 EST

INDIVIDUAL STOCKS

AAPL makes headlines again as the stock falls under $500 and hits a low of $484.  Obviously AAPL is the next NFLX and GMCR.  This is clearly another case of a high P/E stock that traders put an unrealistic valuation on and obviously the stock’s P/E will contract to more normal levels.  Wait, what’s that?  AAPL’s P/E is already well below that of the S&P500?  How can that be???

Okay, sarcasm aside, reports of AAPLs or Apple Inc’s death are greatly exaggerated.  Today’s weakness is nothing more than a large wave of auto-pilot stop-loss selling triggered by falling under an overly-followed support level.  Some analyst caused the selloff by downgrading the stock and while his might be unfair, most analysts are analysts because they can’t trade, so why is the market so concerned when one of these guys downgrades a stock?  Trade fundamental news, not one person’s opinion.

In the markets you are either early or you are late.  No one ever top-ticks the market except through pure luck.  Obviously buying and holding AAPL here is early in the recovery, but hopefully any buyers who stepped into this stock knew this was a longer-term trade and were willing to hold through some near-term volatility.  No doubt AAPL could head lower from here, but $485 is the safest level to own AAPL in almost a year.  Just as anyone who bought on the iPhone5 excitement how that worked out for them.

Nothing changed in the AAPL story except the stock got a bit cheaper.  Hopefully traders are not letting some emotional near-term volatility change their rational long-term analysis.

Stay safe

PM: A third close above 1470

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The bears just can’t break this market and AAPL is finding buyers at $500.

MARKET BEHAVIOR

The S&P500 slid in early trade, but found a bottom at 1465 and recovered most of those losses by the close.  This marked the third consecutive close above 1470.  Volume was slightly below average as traders were taking more of a wait and see and not overly excited about the early selloff or subsequent rebound.

MARKET SENTIMENT

There are always two ways to look at anything in the market.  One side will say the inability to break above 1472 shows a lack of conviction and follow-on buying and it is just a matter of time before the market doesn’t bounce back from one of these selloffs.  The alternative view of the exact same information is the market is trying to selloff, but failing each time due to a lack of follow through selling and is only time before we break through the 1472 ceiling.

I’m in the later camp.  The market had multiple opportunities to breakdown, yet traders resisted the temptation to rush for the exits.  While most traders are reluctant to buy above 1472, that will change as we break through these levels.  Initially we will surge higher on a wave of stop-losses, but afterward the series of higher-highs will convince the remaining holdouts that they need to get in this rally or risk being left behind.

The challenge bears are having is recruiting new pessimists to their side.  With so many people already bearish over the political fundamental, economic, and global news, if you are not already a bear, it is unlikely you are going to become a bear.  And this is why the market has struggled to trigger anything more than a temporary intra-day dip that recovers before the close.  There are no guarantees in the market, but a third support day tomorrow makes a continuation far more likely than a reversal.

TRADING OPPORTUNITIES

Expected Outcome:
Watch Wednesday’s price-action for signs of support.  This doesn’t have to be a positive day as red days can often be supportive if they are calm, controlled, and rational.  A selloff down to 1460 with a recovery to 1465 would be considered constructive and supportive

A third support day here clears the way for people to buy or add longs.  And this goes without saying, but I’ll say it anyway, don’t short the market here.  The trend is clearly higher and wait for the breakdown before trying to short anything.

Alternate Outcome:
The line is the sand is 1450 and a dip under that will most likely signal the end of this rally leg.  Any selling short of a clear violation of 1450 will simply be a dip to the lower end of the trading range and most likely represents a buy-the-dip opportunity.

INDIVIDUAL STOCKS

AAPL struggled today, but the silver lining is it held the $500 level .  Holding support is highly productive, but we do have to be wary of a break under $500 because that could trigger a wave of stop-loss selling.  But I actually think most of the owners who bought the dip recently are in this for the long haul and won’t let a $15 slide under $500 change their opinion about the upside potential.  If we do see a brief dip under $500 before earnings, expect a quick bounce as selling dries up quickly with so few sellers remaining in the stock.

Stay safe

AM: Bears try again

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:20 EST

AM Update

MARKET BEHAVIOR

Markets stumbled out of the gate on reports of weak demand for the iPhone5.  That was all the excuse ambitious bears needed to start selling the entire market.  The early slide picked up speed, but the market found support at 1465 by min-morning and is currently trying to reclaim 1470.

MARKET SENTIMENT

There is an important distinction between what the market should do and what it is doing, and right now bears are struggling with this concept.  Market price is determined exclusively through supply and demand, so no matter what the fundamentals or technicals are, it is still supply and demand that determines the next move.  Sometimes supply and demand goes with fundamentals and technicals and other times it doesn’t  But the market ALWAYS moves with supply and demand.  No matter how outrageously good the news, if the market runs out of buyers, it cannot rally any higher.  And like the situation we have here, no matter how bad the news, if everyone already sold, supply dries up and prices rebound.

TRADING OPPORTUNITIES

Expected Outcome:
This mid-morning bounce might not signal an all clear and we could still see further weakness, but it shows the market is not poised for an explosive move to the downside.  Here again the market had every excuse to selloff, but it found a bottom.  We will watch how this market closes today and tomorrow, and if it continues finding support, the next move is higher, not lower.

Alternate Outcome:
The bounce might be driven by the overly bullish buy-the-dip crowd and they are only delaying the inevitable selloff.  If this is the case, look for a stair-step lower.  The move will be slow motion initially while the last of the bulls use up their capital buying the dip, but once they run out of money, the selloff will pick up speed.  1450 is the lower end of this trading range and breaking this could signal a shift in market direction.

AAPL daily at 1:12 EST

INDIVIDUAL STOCKS

AAPL got smacked down on reports of slow iPhone5 sales.  But isn’t that the reason the stock dropped $200 since September?   Slow iPhone5 sales has been reported on for a while and it is old news already factored into AAPL lower stock price.  Now this doesn’t stop people from hitting the panic button and selling all their AAPL shares, but the downside is far more limited because most of the bearish selling has already happened.

Earlier I said I expected AAPL to rally into earnings, but news like sentiment will most likely hold the stock down.  But this new bearish attitude surrounding the stock makes it safer to hold through earnings.  If the market is already expecting bad news, then there is little selling left in the stock.  But on the other side, less bad news will send the stock higher.

Stay safe

LA: Buy-and-hold is alive and well

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR

Stocks already marked new multi-year closing highs and are on the verge of eclipsing the intra-day high as well.  On virtually every timeframe stocks are making higher-highs and higher-lows.  The last few weeks to the last few years, everything has upward momentum.

Under normal circumstances a bull market lasts three or four years, suggesting this rally is long in the tooth, but that is only if you think the 2009 bear market was normal.  If a 50% correction is unusual, then the subsequent rally will most often be unusual too, meaning we can throw conventional wisdom out the window when judging the age of this bull market.

MARKET SENTIMENT

What makes this recovery different is the 2008/2009 bear marked rocked buy-and-hold investors to the core.   No one believes in buy-and-hold anymore because of just how badly people were burned by that market collapse.  Under normal conditions investors warm back up to stocks and start bidding them up to unsustainable heights again within a few years.  But the 2008 bear market turned everyone into a cynic and we are still years from the next episode of irrational exuberance.

In fact it is amazing how pessimistic people remain even though the market is up well over 100% since the 2009 lows.  Normally those type of gains would have everyone gossiping around the water-cooler about the next sure thing their neighbor turned them on to, but we are nowhere near that level of enthusiasm and complacency, in fact we are just the opposite.  Everyone is expecting the boogeyman to jump out from behind every corner.  Every story is how this event or that policy will collapse the global economy.  The market is obsessed with fatalistic thoughts of imminent doom and that attitude is keeping this 4 year-old bull market a spring chicken.

Nothing ever goes straight up and there will be pullbacks and bear markets along the way, but we are in a 15-year bull super-cycle.  The best time to buy-and-hold is when everyone says buy-and-hold is dead.    It will take the better part of a decade to get traumatized investors out of bonds.  It won’t happen all at once, but slowly over a period of time.  It is this gradual thawing of investor aversion to equities that will provide a steady stream of new money flowing into the equity markets and will create the foundation of this bull super-cycle.

TRADING OPPORTUNITIES

Expected Outcome:
This post ended up taking a far longer view than I originally intended, but the information is good and people need to hear it so I kept it.  The next decade will be phenomenal for buy-and-hold investing and people should stick to the conventional wisdom of keeping most of their liquid wealth in diversified buy-and-hold equity instruments.  For the adventurous use a smaller portion of your portfolio for chasing the next big thing or trying your hand at market timing.

But back to the present, the market continues holding Fiscal Cliff gains.  Look for new highs this week and just as important holding those gains.  A material break under 1450 could signal the start of a pullback.  Material break is more than just a test and a dip under, it is a strong selloff that doesn’t find a bottom and bounce back above support.  The market often tests support and if your stop-losses are too close to the actual support level, you risk getting shaken out in a routine head fake.

Look for the market to build more support and if we haven’t seen a breakdown by Wednesday, expect the rally to continue.  If you want to get in this market, look to buy a dip that tests of support on Wednesday or later.  The advantage of buying a dip near support is you have clearly defined technical levels to use as stop-losses and can bail out of a bad trade with minimal losses.

Alternate Outcome:
A strong selloff OR rally this week should be sold.  Rallying too strongly is not sustainable and will be the final gasps of this leg as it sucks in the last buyers.  On the other side, many people are wary of a selloff and breaking  key technical levels will trigger an avalanche of selling.  The selling will be short-lived, but it is best not to get in the way and keep cash so you can pickup discounted shares from the carnage.

INDIVIDUAL STOCKS

It looks like AAPL is working on a base.  The stock’s personality has clearly changed from last fall’s selloff.  It’s been two-months since the market found support at $500 and arrested the eight-week selling tsunami.  There are two dramatically different views on the stock.  One side says its best days are already behind it.  The other says this is a money-printing machine that is growing at 30% and has a single-digit P/E when you back out the cash.  Only one side can be right and six-months from now we’ll be kicking ourselves for not making the obvious trade.  But that is the problem with hindsight, you often forget just how ambiguous the trade really was when you are surrounded by all sorts of conflicting information.

Stay safe

WR: What selloff?

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

Stocks added to recent gains and the imminent selloff has not materialized.  If everyone is expecting a selloff, the market will often rally instead, and that is what is happening here.

MARKET BEHAVIOR

Stocks finished the week modestly higher and added to the Fiscal Cliff’s big move.  But more important than the 0.4% gain was seeing buyers come in and support the market after such a strong and quick run from 1400.

Looking at weekly charts over the last three years, most rally legs had a string of countless up-weeks, most often in 13 week chunks.  What makes 13 weeks special?  That is the length of a quarter.

We are just a few weeks into this rally and this market is anything but overbought based on historical precedent.  The value of weekly charts is they  filter out the daily noise and show what the market is really doing.  While the daily chart looks scary, the weekly chart doesn’t look so bad.  No doubt we will see intra-week volatility in coming weeks and months, but as long as the weekly chart is going from the lower-left to the upper-right, longer-term holders will be rewarded.

MARKET SENTIMENT

The market has gone from obsessing over negative news to completely ignoring it.  That is why you can’t trade the news, instead trade other traders.  Sometimes fundamentals matter, other times they don’t.  Sometimes technicals work, other times not so much.  But the one thing that never changes is the human element.  Supply and demand is the only driver in the markets and once you understand how other people are positioned, the seemingly random moves start making sense.

A lot of traders still assume this market will pullback in the near-term and are waiting for that correction before buying back in.  Everyone knows it is foolish to chase the market, but what happens if the market doesn’t pullback and continues higher instead?  How embarrassing would it be if money managers missed a big Q1 rally two years in a row?  The market has a habit of humiliating traders and a continued rally would make a lot more people look bad than a pullback.  This simple idea lends a lot of credibility to the continuation.

AAPL weekly at end of week

TRADING OPPORTUNITIES

Expected Outcome:
The trend is higher and there are no signs the market is breaking down yet.  When in doubt, stick with the trend.  Holders should keep holding and bears should stay on the sidelines.  The harder call is for those on the outside watching this market rally without them.  While it is tempting to rush in and buy the breakout, wait a couple of days and see how this market develops.  If we continue building support over the coming week, look to buy that support.  But if the market does anything crazy higher or lower, stay away.

Alternate Outcome:
If the expected outcome is a sensible rally, then the alternate is anything other than that.  Unexpected weakness or strength should be met with an abundance of caution.  Longs should look to lock in profits if the market’s personality starts changing and bears can begin looking for a shorting opportunity.

INDIVIDUAL STOCKS

AAPL continues working on its base around the $500 level.  The volatility doesn’t look nearly so scary on a weekly chart.  If someone is having a hard time holding AAPL, try following the weekly charts instead, and without a doubt turn off the intra-day charts.

How did I do?

SCORE CARD

A review of recent calls from this blog:
December 28th, 2012  “Churning sideways at 1410, but the asymmetric trade remains to the upside as most traders fearing the Fiscal Cliff already sold and holders are willing to hold in the face of this risk.”

Stay safe

PM: Another close above 1470

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

When in doubt stick with the trend, and the strong finish Thursday and Friday confirm support for this market.  But always be on the lookout for a top and know what signals to sell.

MARKET BEHAVIOR

The S&P500 sold off early, but found support and saw-toothed its way higher to finish unchanged.  Ever since the Fiscal Cliff pop, we’ve seen the market try to selloff, but each time it bounced back.  Bull markets often start weak and finish strong, and that is exactly how the market has behaved since the post-election bottom in mid-November.

Volume was average Friday and it seems like most money managers came back early from vacation since almost every trading day this year has been in above average volume.  Of course you can blame the Fiscal Cliff and its fallout for the elevated volatility and volume.

MARKET SENTIMENT

Not everyone is buying this rally, both figuratively and literally.  The morning selloffs Thursday and Friday show some traders are still gunning for this rally and trying to top-tic the reversal lower.  But thus far any profit taking and short-selling has been premature.  The noteworthy thing is these early profit-takers and shorters are actually building the foundation for the next leg higher.  There is only one thing people who sold the market can do, and that is buy the market.  These premature sellers will fuel the next leg higher if they are forced to chase a rising market.

But all good things eventually come to an end, so we need to watch for a potential top.  When will we run out of buyers and nose over?  While Friday’s positive reversal are nice to see, one day’s strength doesn’t constitute new support and the future of this move lies in next week’s trade.  Will we continue finding support?  Will we crush bears with another short-squeeze higher?  Or are we already witnessing the last gasps of the rally and on the verge of nosing over?

It all comes down to supply and demand.  How are bulls positioned?  What are the bears doing?  How many buyers are left?  Will breaking support trigger an avalanche of selling?  All good questions and while there are no definitive answers, we can pull together various clues and make an educated guess as to how other people are positioned and how that influences the next market move.

Cynics of the Fiscal Cliff rally are dime a dozen and up until yesterday’s new closing high, they were waiting for the expected pullback to the 50dma.  But now they are not so sure and some are covering their shorts or adding to their longs to hedge their bets.  But this has only provided modest lift to the market and not triggered the mass buying that signals a capitulation top.  Each day consumes more buyers, diminishing the available pool of buyers, but intra-day reversals like we saw on Thursday and Friday show buyers are still in control and we should assume this is the case until evidence shows otherwise.  When in doubt, stick with the trend.

TRADING OPPORTUNITIES

Expected Outcome:
There is less upside in this rally with every new high, but so far the market keeps marching higher.  I would be reluctant to make new buys here until we see constructive support for these levels next week.  The market is behaving fairly well and a gentle stair-step higher seems the most likely trade.  This could include a modest pullback to 1460, but fall much further and the stop-loss selling will pickup and pressure prices.

But while it is not wise to buy, current holders can stick it out a little longer, but keep a close eye on the exit and don’t let recent profits evaporate if it looks like the market is topping.  And if you are still shorting this market, you need to get your head examined.  We are closer to the day when the short trade will work, but it is foolish to get in the way of this market before there are clear sings of topping.

Alternate Outcome:
If the expected outcome is a gentile stair-step higher, the alternate outcomes will be a surge higher or a plunge lower.  I would be a seller of each and most likely put on a short and ride the market down to the 50dma.  Rallies are more likely to continue than reverse, but every rally ends in a pullback, and so we need to be on the lookout for that day, especially given how far and fast we’ve come over the last couple months.  Obviously a breakdown should be sold, but I would also sell a strong surge higher because that will likely be a capitulation top.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL tried to rally today, but it just couldn’t hang on to it’s gains and finished at $520.  So far $520 has been the magic number as someone is willing to buy shares every time it dips to this level, but it will be interesting to see which side, buyers of $520 or sellers of $520 have more staying power.  Another material dip under $520 could send the stock back to $500, but that simply creates an even more attractive and less risky price for an AAPL bull to get long.  This is a trading stock now and holders need to expect these up and down swings.  Buy weakness and sell strength.

Stay safe

AM: Finding support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:08 EST

AM Update

This morning’s trade is supportive of the rally, but how much further can this go?

MARKET BEHAVIOR

Stocks dipped at the open, but found a floor near 1467 by mid-morning and reclaimed some of the early losses.  The market continues trading around 1470 with several dips below and pokes above.  It will be insightful to see how the market trades into the close.

MARKET SENTIMENT

Seeing some doubt creep in after yesterday’s breakout to new highs is actually constructive.  Markets often top when everyone is yelling buy, buy, buy, and we didn’t get that this morning.   And obviously the other positive is selling didn’t get out of hand either.  Much like after the Fiscal Cliff rally, stable, sideways trade is a continuation pattern.  It is premature to say this morning’s calm signals a continuation, but it is encouraging.

How the day closes will be important as we establish a new trading range.  Will the market rally in the final hours again?  Will it dip back into the old range?  Or will it simply settle near yesterday’s close?

TRADING OPPORTUNITIES

Expected Outcome:
Early selling and subsequent support is constructive.  The two things that will kill this rally are obviously a breakdown, but also a surge higher.  No need to explain how breakdowns kill rallies, but on the other side, a flurry of buying will exhaust the supply of remaining buyers as the candle that burns twice as bright lasts half as long.

Of course I’m rooting for the surge higher because it will make an easy sell and setup a short trade on the resulting pullback, but I will trade what the market gives me and that is shaping up to be more stair-stepping higher.

Alternate Outcome:
The market is completely oblivious to any of the world’s concerns.  And just like how market prices swing up and down, so does sentiment.  We rose a 130 S&P points from the depths of dispair over an Obama reelection and Fiscal Cliff concerns to a place where pessimists are confused, disorganized, and humiliated.  But the paradox of the markets is the fewer the numbers, the more potent the force.  The shrinking bear camp is becoming stronger by the day, and this is something we need to be aware of as bears defect in droves after we cleared old highs.  Momentum might carry this market a little higher, but gravity will eventually take over.  Will that be next week or next month?  We have to keep watching and adjusting our models as new information becomes available.

INDIVIDUAL STOCKS

AAPL gave back some of yesterday’s surge into the close, but is still holding above $520 for the time being.  The stock seems content trading between $500 and $550 leading into earnings.  The September through November slide has clearly paused and found support at $500, indicating the over-owned, emotional, and tax based selling of last year has been contained.  The stock is entering a new phase this year.  Will it be further declines on weakening fundamentals?  A bounce from oversold levels?  Or more sideways trade?  We will know shortly after earnings are released.

Stay safe

PM: The squeeze is on

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The market likes to frustrate the greatest number of traders at any given time.  Since the popular sentiment was waiting for the post-Fiscal Cliff pullback, the market is rallying instead.  But how long can this last?

MARKET BEHAVIOR

A wild day as we gaped up at the open, retreated back to break-even, before finally surging to new highs into the close.  Volume was a bit higher than average and the highest volume we’ve seen since the Fiscal Cliff rally day.  The last couple hours of sent bears running for cover as the expected breakdown turned into a powerful rally instead.

MARKET SENTIMENT

Little doubt the last two hours of trade took bears’ breath away.  Many lost their nerve and bought back their shorts, adding fuel to the fire.  The big question is how much fuel is left in this fire?  Are we just getting started, or are we running on fumes?

The market set another closing high and is less than 0.2% from the intra-day high set back in September.  It is getting really challenging for perma-bears to keep holding their short positions and many are defaulting to the attitude “the market can stay irrational longer than you can stay solvent” and pulling the plug on their shorts.

Tomorrow will most like hit a new 52-week high, but we have to watch how the markets respond after this closely watched event.  Will anyone actually buy this market other than bears covering shorts?  Are sideline watchers starting to chase, fearing this market is leaving them behind?  It would be hard to argue value investors are buyers at these  levels, so who else does that leave?  Without follow-on buying gravity will take over, so the key rests in figuring out if there is a follow-on buyer to keep this rally going.  And while it is easy to discount chasers, they drove the three-month Q1 rally last year so without a doubt chasers can push things far further and longer than anyone expects.

A lot of people assume this market will head higher in the near-term, but pullback not long after.

TRADING OPPORTUNITIES

Expected Outcome:
So many questions and so few answer.  As I stated above, the market could be running out of gas, or just getting started.  For a while I’ve called for one last short-squeeze before breaking down and today could very well be that day.  Or it could be the start of a larger squeeze.  Or it could be the start of a larger and longer move higher.  There is too little information  to make an intelligent decision and the next couple trading days will be key in signaling what the market thinks and how it is positioned.

I would be highly reluctant to add new money here.  If you are sitting on cash, stay in cash and wait for the next trade.  It is better to miss a trade than force it.  The year is just getting started and there will be countless other profit opportunities.  For swing-traders sitting on some profits, watch the market closely because we are getting close to the time to start reeling in those profits.  A strong surge higher wold make me a seller or at the very least set up a trailing stop, I would sit through a modest gain or pullback, and a big selloff through 1450 would get me short.

When in doubt, stick with the trend.

Alternate Outcome:
Since the expected outcome is so ambiguous, there really isn’t an alternate outcome and we are simply waiting for further information.  I remain bullish on the economy and market over the longer-term, it the timing of the near-term pullback that is so hard to pin down.  But there is no reason to hold out for top dollar.  Take your profits and wait for the next trade because there is no greater shame in the market than letting hard-earned profits evaporate into thin air.

AAPL daily at end of day

INDIVIDUAL STOCKS

The market rebound breathed new life into AAPL and it recovered nicely from the intra-day lows. And so the swing-trade continues.  AAPL goes up and AAPL goes down.  If you are following the crowd in and out of this trade, you are losing your shirt, but if you go the other way and buy the dips and sell the rallies, you should have a nice profit cushion that could mitigate the risk of holding through earnings.

This is nothing more than a hunch, but I think AAPL has seen most of its selling already and will rally into earnings as more optimistic traders buy the stock in anticipation of AAPL blowing away expectations yet again.  But if the stock does rally into earnings, that changes the risk/reward and makes it a lot more vulnerable to a pullback if earnings disappoint.  But that is a little premature and we’ll cross that bridge when we get there.

Stay safe

AM: A higher-high

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EST

AM Update

Markets gapped at the open and notched new post-election highs, but started sliding and filled the gap by mid morning.

Stocks hit their head on 1470 and retreated to yesterday’s close of 1461 before finding support and bouncing back to the middle of the range by mid-day.  A little something for bulls, bears, and everyone in between.

MARKET SENTIMENT

The market continues marching higher in spite of all the reason it should selloff.  Bears will point to the retreat from 1470 as a lack of conviction, but that is just grasping at straws.  The retreat from 1470 is seducing shorts into holding, or worse yet adding to their positions.  They say you can boil a lobster without him realizing it if you raise the temperature one degree at a time, and that is what the market is doing to bears here.  The market takes a bite from them, retreats a bit and lulls the bears back into complacency.  As long as the market keeps taking little bites, the rally will continue.  What we need to watch for is the high-volume climax where the rate of gains ramps up and finally sends bears running for cover.  After the last bears are chased out of the market, buying will climax, demand dries up, and we head lower.  And the cycle continues……

TRADING OPPORTUNITIES

Expected Outcome:
Stocks are making higher-highs.  The trend is clearly up and there is no reason to get in the way of this steamroller yet.  The market is digesting the Fiscal Cliff gains over time instead of pulling back.  As long as pessimism persists, look for the rally to continue.  Stocks rally in the face of pessimism and decline on the back of complacency.  At this juncture we are still a ways from complacency.

How far we can go from here is anyone’s guess, but a possible scenario is rallying through the Debt Ceiling compromise and once everything starts looking good, complacency sets in and the market finally pulls back.

Alternate Outcome:
Anything can spook the market, including its own shadow.  An unexpected event could put a chill over the market and send us through all the stop-losses under 1450.  If this happens, we need to keep an eye on the price action and sentiment to determine if the market is rolling over and worthy of selling, or the dip is just another bear-trap before bouncing higher.

AAPL daily at 1:16 EST

INDIVIDUAL STOCKS

AAPL is having a tougher go of it this morning as it gapped higher at the open, but its slide took it into the red and it hasn’t seen the same bounce the S&P500 has and it continues trading near the lows of the day.  Right now the stock is plagued by momentum investors that are jumping all over each rally and pullback.  These swing traders don’t care for the underlying value and are just playing a game of Chutes and Ladders.  Even if you don’t play that game as a trader, it is helpful to understand the rules so the resulting volatility doesn’t shake you out at the exact wrong time.  For the last three months the best trade on AAPL has been buying the dips and selling the rallies.  If this continues, the smart call is buying weakness and selling strength, so rather that sell AAPL here, look to buy or continue holding instead.

Stay safe

PM: Support is holding up

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The market continues holding the Fiscal Cliff highs in spite of the negative headlines and those saying we need to pullback.  The more negative sentiment is, the more supportive it is for a continuation.

MARKET BEHAVIOR

Stocks were higher after two days of selling, but they gave back some of the early gains and closed off the day’s highs.  Volume was above average and slightly ahead of Tuesday’s selling volume.  The market is still flirting with the 1460 level that proved too difficult for last fall’s rally to hold.  From this a bear sees a double top and bull sees higher-highs and lower-lows.   Part of what makes chart reading so difficult is a trader can see whatever he wants to see.

MARKET SENTIMENT

We continue holding the Fiscal Cliff rally and resist the pressures of profit-taking and pessimistic headlines.  But while we are not selling off, not many people are buying this market either, leaving us in no man’s land as both sides are waiting for the confirming breakout/breakdown.

The one thing that pushes the needle in the bulls favor is bears are actively trying to break this market and failing to do so.  Bulls are cautiously holding, but not overly vocal about their confidence in the move higher.  If the easy trade is the wrong trade and the hard trade is the right trade, then I’d have to say owning this market after an explosive move higher is a lot harder than shorting it.  Selling the 65-point rally is the obvious trade, while buying the 65-rally doesn’t make a lot of sense intuitively and triggers a fear of heights in most rational people.  But if the markets made intuitive sense we’d all be rich right now, so maybe the non-intuitive (ie contrarian) trade is the one to make.

TRADING OPPORTUNITIES

Expected Outcome:
Not much has changed over the last several days, so my expectations remain the same.  We are holding these levels which is supportive of a continuation.   Selloffs from grossly overbought levels happen quickly and this support shows we are not grossly overbought   Further, breaking above recent highs will trigger a short-squeeze and push the market even higher.

Alternate Outcome:
I’m just making up numbers here to demonstrate a point, but lets say the probabilities of a continuation are 80% and selloff are 20%.  To keep things simple, lets assume the potential upside and downside moves are of equal magnitude.  Under these circumstances, the smart trade is going with the continuation.  And while more often than not this trade will make money, one out of five times the low probability trade will come out on top.  But this is supposed to happen and doesn’t mean you or your analysis are wrong.  If the low probability trade didn’t happen 20% of the time then it does mean something is wrong!

In the market it is normal, healthy, and expected to be wrong.  (The danger comes from staying wrong.)  Stick with the high probability trade and you will make more money than you lose and don’t let the frequent strike-outs discourage you as long as you practice prudent risk management

AAPL daily at end of day

INDIVIDUAL STOCKS

Much like the indexes, not a lot new is happening with AAPL.  The most significant thing is the stock lost a few dollars and closed under $520, a level it was finding support at the last few days.  But this was only minor support.  The primary support is down at $500 and the story remains intact as long as we still hold above this level.  But the stock is quickly becoming a binary trade revolving around the upcoming earnings.  The stock will pop or plunge on earnings because there is just too much disagreement over the future of this company and earnings will prove one side right and the other wrong.

Stay safe

AM: Stocks find some footing

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:20 EST

AM Update

Stocks are finding their footing after recent weakness.  The longer we hold these levels without breaking down, the more supportive it is for a continuation of the rally.

MARKET BEHAVIOR

Stocks are clawing their way higher after recent selling, regaining the 1460 level and adding to the cushion above support at 1450.  The thing to be aware of is the large number of automatic buy-orders above recent highs of 1470 and sell-orders under 1450.  Right now we are comfortably in the middle of this range, but expect a decisive break once we move out of this consolidation.  The longer we stay within it, the stronger the reaction will be.

MARKET SENTIMENT

Traders are still trying to come to terms with this rally.  It is hard to find anyone with something good to say about the world, in fact the leading reason bulls use to justify buying this market is that it is going higher because there is not much else for them to hang their hat on.  Since we profit from price movement, not fundamental data, bulls have a valid point here.

It is tough to embrace this market, but that is what makes it buyable here.  Pessimism remains the rule and we are a long way from complacency.  A lot of people confuse contrarian investing with going against the trend, but that isn’t right, contrarian investing is going against the popular opinion.  In many cases the contrarian trade is going WITH the trend when everyone doubts the sustainability of the trend.

Fundamentals will eventually catch up with the market, but is that bearish or bullish?  There is a lot of fear surrounding the economy and politics, but I cannot think of one important indicator that is declining.  Employment, GDP, political compromise, and other hot button issues are all trending in the right direction.  It might not go as fast as most hope, but recoveries rarely do.

TRADING OPPORTUNITIES

Expected Outcome:
We continue holding the Fiscal Cliff gains, building more support for these levels with each passing day.  Most of the profit taking and short-selling has happened already, yet here we stand.  The bears had a couple of opportunities the last few days to drive this market lower, but they failed to trigger follow-on selling.  All of this signals the likelihood of a continuation.  Maybe this next leg higher will be short-lived, or it will be part of a larger move, it is too early to say.  We will need to sample trader sentiment and positioning as it develops.  A steady crawl higher is sustainable, a spike on high volume that quickly fizzles is most likely the start of the pullback.

Alternate Outcome:
The market could easily breach 1450 support and trigger a wave of autopilot selling, leading to a follow-up wave of emotional selling, especially if sellers feel justified by some unnerving news story.  Without a doubt the market will correct at some point, the only question is when.  Support at 1450 seems to indicate this is not that time, but that could easily change.  If this were easy, everyone would be rich.

INDIVIDUAL STOCKS

AAPL is selling off modestly but finding support at $520 as big money managers seem willing to support the stock at this price.  How long this can last is anyone’s guess, but the longer we stay near this level the more likely it is we will dip under it.  There are still a couple of weeks before earnings are released and we should expect some choppiness until there is more clarity about sales.  If AAPL exceeds expectations like they normally do, expect a strong pop out of this stock.  But even if earnings disappoint  the stock has sold off and much of this is already priced in.   It would be surprising to see AAPL dip very far into the $400 range unless there were signs of serious trouble at the company

Stay safe

PM: High-volume reversal

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks sold off for a second consecutive day, but they found support at 1451 in early trade and finished near the middle of the day’s range.  This was the third red day out of the last four, but stocks are only down 5-points from the Fiscal Cliff rally day’s close.  Volume was above average today, showing a fair amount shares changed hands.  One interpretation is today’s high-volume reversal was a capitulation bottom for this modest selloff.

MARKET SENTIMENT

Bears tried again to break this market but were spurned as we bounced off support at 1450.  Everything was there for a larger selloff, it just failed to take hold.  Maybe we are stair-stepping lower, but corrections from grossly over-bought conditions typically happen quickly and dramatically.  Using that as a benchmark, holding these levels for five-days seems to indicate this market is not grossly over-bought.  While it still might be over-bought, it is not grossly over-bought and we shouldn’t expect an imminent plunge.

A lot of people are shooting for this market and expecting a pullback.  Between the negative headlines and the massive run-up,  both fundamental and technical traders are wary of this market.  I have no doubt they are right, but in the market it isn’t so much about figuring out what the market will do next, but identifying and trading the exact timing of those moves.  In the markets early is the same thing as wrong.

TRADING OPPORTUNITIES

Expected Outcome:
Stocks continue showing strength even as we are down three out of the last four days.  The declines have been so modest in comparison to the 65-point, two-day rally that they can be counted as wins.  Everyone is expecting a pullback, but it isn’t happening.  Often this is a sign to take the other side of the trade.

While the market might head higher from here, we can’t become complacent and need to recognize that the next leg higher might be the last of this rally, so don’t get greedy and be prepared to take profits early.

Alternate Outcome:
We are a few points from a huge number of stop-losses sitting under 1450.  It isn’t out of the realm of possibility that market makers will nudge us through that level just to trigger all that trade.  After a certain point, selling can take on a life of its own as selling begets more selling.  And of course an unexpected news story could send the markets lower at any time.  There is no risk-free trade and we always need to have a plan to respond if the market moves against us.  It would be great to make money on every single trade, but that just isn’t realistic.

INDIVIDUAL STOCKS

AAPL actually closed in positive territory today.  Right now $520 seems to be the level where buyers will step in and accumulate shares.  If we hold this level, look for a move above $550 to create a bullish pattern of higher-lows and higher-highs.

Stay safe

AM: Fortune favors the bold

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:15 EST

AM Update

MARKET BEHAVIOR

Markets are selling off for a second day, but temporarily found support in early trade at 1451.  1450 was overhead resistance in December and is acting as support here.  Even though the day is red, we are still close to the Fiscal Cliff highs and a wave of selling has not consumed the markets…….yet.

MARKET SENTIMENT

Declines over the last two-days have bears licking their chops, but a 15-point pullback after a 70-point rally can hardly be called breaking down.  No doubt things can accelerate from here, but so far the market is holding up well and this modest pullback is far more bullish than bearish.

This weak spell is seducing bears to short and spooking weak longs into selling.  The question is if all this selling will hit critical mass and trigger further selling, or if this bout of weakness will clear up and we head higher on lack of supply?  Two consecutive red days is an open invitation for people to start dumping shares, but the modest 15-point decline shows people are relatively comfortable holding because they expect better things to come.  It is bullish if these holders are longer-term investors willing to hold through some near-term volatility.  But if too many are greedy momentum chasers bought this rally late in the move, that sets the stage for a selloff as these emotional traders rush for the exit all at once.

The unique thing about the recent rally was the speed and timing in which it happened.  Occurring during the holiday-split week and having a monster gap on the second day reduced the number of shares chaining hands during this move.  There simply wasn’t time to spook out shorts or let value investors sell to chasers.  We woke up last Wednesday to a monster gap and everyone was caught flat-footed.  The internal dynamics were different from a rally that marches higher and develops over time.  A lot of shorts stayed short because they are waiting (praying) for the inevitable pullback.  Chasers also saw how big the gap was and area developing an aversion of heights.  And previous value investors are more confident in their position since they were proven right after buying the Fiscal Cliff dip.  And this is why selling hasn’t accelerated.

TRADING OPPORTUNITIES

Expected Outcome:
Although the market is getting close to the 1450 level, it hasn’t broken support and the current price action hints at a continuation.  If the market finishes off the lows, that means it resisted the temptation to collapse in a wave of selling for a second day in a row.  Based on this support, the dip should be bought, not sold or shorted.

Alternate Outcome:
The market is not a science and technical levels are better drawn with crayons than a straight edge, so a dip under 1450 doesn’t automatically kill the rally, but a plunge under it does.  I know this is a little ambiguous  but if analyzing the market was easy, everyone would be rich.  And that is the art of tape reading, knowing what is a real breakdown and what is just a test of support.

A lot of people are watching the 1450 level and a violation could send us down in a wave of stop-loss selling, especially if a new negative news story give buyers pause.  But for the time being, I think the upside potential of another short-squeeze is greater than that of an avalanche of selling, but I reserve the right to change my mind as conditions develop.

INDIVIDUAL STOCKS

AAPL is trading just above $520 as everyone waits for earnings.  So far nothing has changed and that is why the stock is stuck in this $500-$550 range.  The recent trade and news hasn’t changed anyone’s mind on the stock and it will take new fundamental data out of the company’s earnings release to break this log-jam.  The one exception would be if traders start warming on the stock and start buying the stock in anticipation of a strong Q4 result.

Stay safe

PM: Bears can’t push this market down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

The S&P500 finished lower for the day, but more importantly was able to hold recent support at 1455.  As much as bears want to break this market, they were unable exploit today’s weakness and failed to make much of a dent.  The lack of follow on selling after early weakness is bullish and supportive of these levels.

MARKET SENTIMENT

With as many reasons for the market to selloff, it is holding solid.  Some think we came too-far, too-fast, others are pointing to the Debt Ceiling, and then there are things that fell off the front page like Europe and the economy.  But the market is oblivious to these concerns and rallying in spite of the pessimism.

What is confusing fundamentalists and technicians actually makes a lot of sense when you look at how people are positioned and the effect this has on supply and demand.  All of the negative headlines are recycled stories from months, even years ago.  The market responds to new and unexpected news, not the things everyone including your mother in-law is talking about.

The old news is already priced in  because those that were going to buy or sell based on it have already done so.  Markets respond to new buying and selling, not stuff that happened weeks or months ago.  People can change their mind regarding certain risk factors and that will move markets, but if attitudes stay the same, then there is no new trade and thus no price move. Until people start talking about the Debt Ceiling and Euro Contagion as bullish catalysts, we can assume attitudes toward these situations remains pessimistic and priced in.

Back to today’s trade, everyone knows we are too high and anyone with a fear of heights already sold.  Same goes for the early pessimists fearing the Debt Ceiling.  All the bears have already sold, yet here we are just a fraction off a 52-week high.  That doesn’t bode well for bears because not only do they not have the strength to push the market lower, paradoxically the large number of bears is creating the fuel for the next rally leg.  When pessimists are out of the market, they cannot further pressure prices, but they can buy back in and that pushes prices higher.

TRADING OPPORTUNITIES

Expected Outcome:
Today’s price-action was bullish and supports a continuation higher.  The market had every opportunity to crumble, but it held up because bears are not in a position to pressure the market.  After they sold last week, the only thing they can do is watch (or buy back in and push prices higher).

I’m becoming more bullish on this market and there might be a nice upside trade.  But at the same time there is merit to the too-high, too-fast crowd’s argument, so any upside profits should be locked in fairly quickly.

Alternate Outcome:
Markets can breakdown over the littlest things and that can certainly happen here.  While most of the selling has already taken place, that is only half of what can make a market sink.  Lack of demand can also pressure prices.  And if fear grips the market, formerly bullish holders can turn into sellers.  While the high probability trade is to the upside, the downside risk is still very real and we need to be prepared to deal with it if the lower probability events becomes a reality.

INDIVIDUAL STOCKS

AAPL found support after early weakness.  While the stock finished in the red for the day, today’s price action is supportive and shouldn’t spook and holders out of the stock.  If the broad market makes a move higher, AAPL will follow.

Stay safe

AM: Testing the recent consolidation

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:31 EST

AM Update

MARKET BEHAVIOR

Stocks are selling off this morning, but still within the recent consolidation.  Holding support for a 3rd day in a row would be bullish and signal a continuation of the rally because breakdowns from significantly overbought levels happen fairly quick.  We need a material breach of the 1450-1455 level before confirming a breakdown.  We are close, but it will all depend on how the market closes this afternoon.  Failing to hold support could send us back to the 50dma, but a bounce could signal another round of short-squeezing.

MARKET SENTIMENT

A lot of people want to see this market selloff after last week’s sharp rally, the question is if the market wants to cooperate.  Right now it feels a little too easy to short this weakness and that doesn’t bode well for bears.  The best trades are often the hardest ones to make and right now buying seems to be the hardest thing to do.

Often the best way to determine what the market will do next is figure out what movement will create the greatest pain for the largest number of traders.  A breakout from here would please the bulls.  A breakdown would please the bears.  That’s too easy.  How about a whipsaw to zing both sides and make everyone look stupid?  A breakout above resistance will squeeze out all the shorts and tempt in the breakout buyers, but then reverse lower from the new highs to make everyone look stupid.  That is why I think the high probability trade is one more short squeeze before selling off.

MARKET OPPORTUNITIES

Expected Outcome:
In spite of today’s weakness, we are still holding the recent support area and this is bullish for higher prices.  We are so close to new highs that the market will invariably be drawn to breaking them even if the next move is lower.  Look for one more leg higher in the near-term, but then watch out for the pullback.  This setup is hard to trade and most would be better off waiting for a higher probability trade and just sitting this one out.  Longer-viewed traders can continue holding, just expect some near-term volatility and don’t let that shake your confidence.  Headlines are about to get ugly again over the Debt Ceiling, but this creates buying opportunities and is not a reason to sell.

Alternate Outcome:
The market can selloff for any reason and doesn’t always do what it is supposed to do.  A material break of 1450 would signal a lack of willingness form buyers to step in and we could see the slide everyone is expecting due to a lack of demand.  But don’t get short the market until we beak support and take profits quickly because this is just a counter-trend trade, not a material selloff.

AAPL daily @ 1:31 EST

INDIVIDUAL STOCKS

AAPL saw early weakness, but bounced back above $520 by late morning.  It is encouraging to see the stock find some footing after the last couple days of selling.  It looks like the stock wants to chop sideways until we get better clarity from the earnings report in a couple of weeks.  So far the stock has been a safe buy near the $500 level, but that won’t help if earnings disappoint.  I think the stock has seen a lot of selling ahead of this earnings report and most of the pessimism is already priced in, meaning most of the downside risk has already been realized.  On the other side, a positive report will launch the stock higher.  Limited risk on the downside, explosive upside potential, sounds like a great trade.   But there are no guarantees in the market so always practice prudent risk management.

Stay safe

WR & LA: Does this rally have legs?

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review & Look Ahead

MARKET BEHAVIOR

The S&P500 was up decisively last week with a 4.5% gain.  Weekly volume was less than average, but the holiday shortened week played a big role in that.   The market is up an impressive 120-points since the post-election bottom in mid-November.  For as bad as the headlines and sentiment have been, we are a fraction from new 52-week highs.  Just another example of the contrarian trade being the right trade.

MARKET SENTIMENT

Obviously the big catalyst was the last-second Fiscal Cliff compromise, but the size of the rally had less to do with the news and primarily driven by the imbalance in trader sentiment and positioning.  Most traders were expecting us to fall off the cliff, sold ahead of time to avoid the near-certain collapse, and the market exploded higher when things turned out less bad than feared.  This was a beautiful asymmetrical trade.  Most of the selling occurring ahead of time, limiting the downside risk, and the oversold condition created a coiled spring to the upside.  A savvy trader prints money with setups like that.

The actual Fiscal Cliff compromise is nothing to get excited about and we will be back on the brink in a matter of weeks as the Federal Govt hits the Debt Ceiling.  Fundamentals are just as bad today as they were last week, but we find ourselves 5% higher because shorts were forced to climb over each other to cover their positions.  Normally this lays the foundation for a pullback, but after the market’s most recent rally, skeptics are a dime a dozen and it is these remaining skeptics that made the market drift higher in the later half of the week.

TRADING OPPORTUNITIES

Expected Outcome:
Overbought markets correct fairly quickly.  We saw two support days on Thursday and Friday, suggesting we are not overbought and have more upside before the inevitable correction.

Monday’s price action will go a long way to let us know what direction this market wants to go.  A breakdown signals a retest of the 50dma.  Anything short of a breakdown shows this market is not ready to selloff and another short-squeeze is on the menu.

Shorting the market here is a bad idea and instead wait for the breakdown before jumping in front of this rally.  You’ll be a little late, but you will reduce your risk exposure dramatically.  Further, a short here is a counter-trend trade, so don’t get greedy and take profits early and often.

For longs, we are closer to the end of this rally than the start and it is too late to chase this winner.  For those on the sidelines, the best trade is to wait for the next opportunity.  Any swing traders start looking for opportunities to lock in profits wait for the next trade.

Alternate Outcome:
The market doesn’t always do what it is supposed to and if we don’t see one of our expected scenarios play out, step aside and wait for the next opportunity.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL finished up for the week, but well off the weekly highs as the stock sold off on market share concerns.  The stock is still comfortably above the $500 level, but technical will become meaningless after earnings are announced this month.

A couple of months ago everyone was bullish on AAPL, but the recent pullback brought out the cynics and they’ve become more vocal with every leg lower.  As popular as AAPL is, it has created a lot of passion on both sides and the stock will most likely move strongly one way or the other after earnings are announced.  One side will be decisively victorious and the other will run home with their tail between their legs.

With the lowered expectations, the higher probability trade is to the upside.  Of course there are no guarantees and that is where prudent risk management is essential.  No matter how good a setup looks, always trade so you can live to fight another day.

ET CETERA

I changed web hosts over the weekend and that caused some downtime.  I’m doing my best to ensure a smooth transition, but if you notice something not working, please let me know about it through the contact form above.  Hopefully it will be a seamless transition for everyone.

Stay safe

PM: 52-week closing high

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

The S&P500 closed up 0.5%, setting a new 52-week closing high and is just half of a percent from the absolute high.  Volume was average, but less than the previous two days.  The market is 55-points above the 50dma and just over the 1460 level that last Fall’s rally could not hold.

MARKET SENTIMENT

A lot of people are waiting for the market to pullback because everyone knows a two-day, 65-point rally is too-far, too-fast, but in the markets, the obvious trade rarely works out.  Most of the doubters have already locked in profits and/or sold short, yet we are still inching higher.

If most of the preemptive selling has taken place, supply is on the verge of drying up and we could see a new 52-week high next week.  That would send a lot of shorts running for cover and tempt breakout buyers to jump on board.  As the market continues its march higher, it will suck in the last undecided watching from the sidelines, but these last stragglers will signal the top as this time we run out of buyers and demand dries up.

TRADING OPPORTUNITIES

Expected Outcome:
Much like everyone else I expect a pullback, but I also see higher prices before that pullback happens.  Breaking 1475 would mark a new high and send shorts running for cover.  That last short-squeeze could be the top, or it could kickoff the next rally leg, it all depends on what other market participants think and how they are positioned as we make that new high.  If sentiment turns positive and breakout volume is huge, that would be a signal to fade the move.  But if  volume remains modest and most traders resist the temptation to buy, then the rally will continue.

Alternative Outcome:
This thing has to breakdown at some point and it could do that out of the gate Monday morning.  We need to close around 1460 to show support for the recent rally and if the market cannot do that, then the pullback will happen without a final short-squeeze.  No one knows for certain what will happen next and that is why we need to plan for multiple scenarios so we are better prepared for whatever the market throws at us.  It seems more likely the market will head higher, but that is no guarantee.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL diverged from the broad market and lost 2.8% on concerns over market share.  The stock couldn’t find a bid and finished near the lows of the day.  No doubt this selloff sent a chill of fear and regret through many of the chasers who bought near $550.  Some of them probably even sold impulsively today as they feared the headlines and a bigger selloff.  But if a person bought in the low $500s, then this pullback is no big deal.  A big part of success in the markets is buying right.  If you can buy right, everything else becomes a lot easier.

Stay safe

AM: 20,000 views!!!

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:14 EST

AM Update

This morning I logged my twenty-thousandth view and I want to thank everyone for their enthusiasm and positive feedback over the last few months.  I am glad so many people find value in my analysis and I am always happy to share.  But the real benefit for me is these posts force me to be be thoughtful, analytical, and rational in my approach to the market and it has taken my personal trading to the next level.  Most people with teaching experience know the best way to learn something is to teach it, and I want to thank everyone for being a willing audience and allowing both of us to grow through this experience.

MARKET BEHAVIOR

Stocks continue trading around the 1460 level.  Reversals from extreme overbought conditions tend to happen within a couple of days, so barring a breakdown this afternoon, the market is firming up around these new levels and setting the stage for a continuation.  Monday will be the real test of this level and if we hold, expect higher prices, not lower.

MARKET SENTIMENT

Predicting the market is easy, the hard part is correctly timing those predictions.  Markets always pullback, but all the money is made in figuring out when they will pullback. There are a lot of traders afraid of this market and calling for an imminent pullback,  but we still haven’t seen evidence of that happening.  The longer we hold up in the face of this bearish sentiment, the more bullish it is for stocks.

TRADING OPPORTUNITIES

Expected Outcome:
The longer we hold at these levels, the more supportive it is for a continuation.  Maybe that is just one last short-squeeze, or maybe it is another leg higher.  But either way, this is becoming a dangerous place to be short the market.  We will eventually pullback, but the longer we hold at 1460, the less likely an imminent pullback from this level becomes.

Alternate Outcome
Rock-steady value buyers who purchased shares during the height of Fiscal Cliff pessimism are locking in profits and selling to more emotional traders who chase the market.  This is building a fragile foundation of owners who will panic at the first signs of weakness and negative news.  We might not yet have a critical mass of flighty owners in the markets yet, but their numbers are growing by the days and we shouldn’t expect the rock solid support we found near 1400.

AAPL daily @ 1:14 EST

INDIVIDUAL STOCKS

AAPL is plunging 2% over alleged market share concerns.  But in reality it is just some selling after a big run.  The stock closed the gap and is hopefully building a foundation to continue higher.  As we discussed earlier, AAPL is becoming a trading stock and as expected it hit some resistance at its 50dma.  But so far nothing is wrong with the stock and the only people who have to worry are those that chased it up at $550.  This further reinforces the approach of buying when you don’t want to buy and selling when you don’t want to sell.  It was tough to buy when the stock retreated to $500 and it was tough to let go after it surged to $550.

Stay safe